Question

1. explain i) how the Nasdaq Composite index and its P/E ratio changed during the past 20 years, and ii) why most investors think there was a bubble in the valuation of technology stocks 20 years ago but not now.

Answer 1

I)Nasdaq composite index price to earnings have changed significantly during the past 20 years because in the late 1990, Nasdaq index was trading at unsustainable valuations as investors were highly bullish on technology stocks and they were buying technology stocks at high premium as they feared missing out on them and that led to unsustainable valuations in NASDAQ index and bubble ultimately bust in 1999, when index crashed and then it was trading at reasonable undervaluations.

Once valuation corrected, then in the previous decade valuation stabilized. Again in this decade the index is richly valued.

ii) Most investors think that there was a bubble in index 20 years ago, because there were extremely rich valuations without any improvement in the earnings of companies but at the present times the high valuations are backed by quarterly earnings from those shares and future growth prospect which is on the brighter side.